CollectionIndustry.com Readers: OSI Bankruptcy will Negatively Impact the Industry

Last week, as a House subcommittee heard testimony from some of the leaders in the accounts receivable management industry that could potentially bring billions of dollars in new business to collection agencies, one of the industry?s giants fell. Outsourcing Solutions Inc. (OSI) announced the voluntary filing of Chapter 11 bankruptcy protection for debt restructuring on Tuesday. An event like bankruptcy filing at a company as large as OSI (8,000 associates in 70 offices) surely impacts the Accounts Receivable Management industry as a whole. After seeing nearly 5,000 of its users view the news story on OSI in 24 hours, CollectionIndustry.com asked its readers what they thought the effect would be. We got dozens of responses in mere hours from our members, including those at OSI, who were obviously ready to discuss the events of last week.

OSI, in a letter to CollectionIndustry.com, said that the effects on the industry should be minimal. They would like to emphasize the theme of ?business as usual? during the restructuring. Operations will continue, cash flow will be as strong as ever (in fact, now bolstered by a $22 million facility from its creditors), and financing for additional debt portfolios has been lined up. OSI would also like to point out that no closings or layoffs are planned as a result of the filing. The sole issue in this filing is the company?s debt level. They claim that during debt negotiations with their creditors, due to the holdout of a few banks, it became obvious that Chapter 11 was the ?fastest and most efficient way to complete the debt restructuring?. OSI figures that when it emerges from Chapter 11, its debt level will be the lowest of all major receivables management firms. But overall, OSI reiterates their ?business as usual? stance and the minimal effects of the filing on the industry as a whole.

Many of the readers at CollectionIndustry.com voiced different opinions. One reader writes: ?There has never been a worse time for our industry to have one of the giants go bankrupt…This will make it more difficult for other agencies and debt buyers to borrow money. This tarnishes the debt buying and collection agencies’ images that we have worked so hard at maintaining.? While this particular comment does not spell gloom and doom for the industry, it does paint a realistic picture of some of the specific problems collection agencies and debt buyers will face with creditors going forward.

Another reader, concerned with the industry and the perceived betrayal of trust between agency and client, wrote: ?Our clients trust us to run a business that is responsible and honest in dealing with our consumers and clients. When a facility does not run in this fashion it generates negative feelings towards our industry?.

Of course, a very common comment, in fact the most common, was the present state of the economy. Many debtors, whether they be consumer or business, are strapped for cash and unable to pay. ?The OSI impact demonstrates that all companies are vulnerable to the current state of the economy. OSI has been a respected name in the industry. [But] margins are tight and the market is highly competitive,? wrote a reader concerned with the economy. Another comment on the economy: ?Just show[s] how cutthroat our business is, and how hard it is to collect right now in today?s economy; people want to pay, they [just] can’t!?

While the economy was certainly a strong theme in many of the comments we received, some decided to take a shot at consolidation in general: ?My belief is the industry may see a resurgence back to the smaller individually owned collection agencies. This proves the point biggest is not always the best.? While rolling up collection agencies in a haphazard manner is not the most prudent way to conduct business, consolidation can have a positive effect if done properly. Where did OSI go wrong? Mike Ginsberg, of Kaulkin Ginsberg, explains: ?OSI’s restructuring illustrates the problems that exist when sizeable acquisitions are made to quickly gain market share without having a defined plan for integration. In the case of OSI, I always questioned why they purchased Union Corp., Payco, AM Miller and others when these agencies clearly had overlapping clients and services. The only rationale was to gain critical mass as quickly as possible to position for an IPO or sale. Integration was viewed as a distraction. The puzzle was not going to be assembled until all the pieces were acquired.?

While many respondents offered their own reasons or consequences involving the filing, some took this as an opportunity to suggest how this can be avoided in the future: ?Just another example of why collection agencies need to stop competing against each other by underbidding ourselves out of business.? This sentiment was reinforced by another reader: ?I believe that it goes to show that rate cutting agencies just cannot afford to operate. How can they possibly work an account the way they should be worked then a charge bargain basement rates??

OSI also got its fair share of support: ?OSI is a solid company. I have no doubt they will [turn] things around.? One reader envisions a possible happy ending for OSI: ?OSI could emerge from Chapter 11 a very strong and nimble competitor. They will have a new reality from a pricing perspective as the burden of a very significant amount of debt is removed. Much like MCI right now, this could be step one in a meaningful competitive advantage.? Another glowing piece of support: ?It appears the Chapter 11 was driven more by debt restructuring vs. operating capital crunch. My experience with OSI would also lead me to believe the operations are still viable?I think it may be premature to consider that this will have a negative effect on industry as a whole and I believe OSI will likely emerge from bankruptcy in a relatively short time frame.?

The economy, unreasonable pricing, even OSI?s own management were blamed by our readers for OSI?s filing (the management comments we left off since most were just downright mean-spirited and most likely inaccurate). Overall, the most common response was the economy, in one way or another. There were also many readers that felt that OSI had priced its services so low that margins were irreparably damaged. But most readers that responded disagreed with OSI?s take on their filing: this will affect the industry.

Whatever view you may have as a credit and collection industry professional on OSI?s bankruptcy, this much is certain: banks will take note. Whether this actually has an effect on capital access remains to be seen. But it is an undeniable fact that this bankruptcy will have a negative effect on the industry.